Japanese economic troubleBen Bernanke doesn't seem to have high regard for how Japan has managed the response to the bursting of its economic bubble over the past 20 years. His decision on Nov. 3 to launch a second round of quantitative easing worth $600 billion reflects his view that the U.S. could become economically stagnant, as he believes Japan has become, unless it moves aggressively to keep a deflationary spiral from catching hold.

But Japanese management has adapted effectively to many challenges -- sometimes more quickly than others. In the 1970s, it created a powerful response to the economic stresses of twin energy crises. And, yes, Japan is struggling with two decades of slow growth, but it's possible that Japanese management could yet emerge renewed and more effective.

What brought America's attention to Japanese style management was the country's evolution into a powerful economic rival to the U.S. in the 1980s. When management scholars studied Japan they found a set of powerful management principles. Here's my summary of them:

  • A spirit of continuous improvement
  • A so-called convoy system in which large, manufacturing-based enterprises created closed networks of suppliers and distributors
  • Close attention to the details of product quality, supported by cross-functional communication
  • Linking a detailed understanding of customer needs with a workplace environment that motivates employees to satisfy those needs
  • A willingness to learn from competitors' best practices
  • A system of lifetime employment that passes down wisdom from more experienced employees
  • Government-directed industrial policies that create controlled Darwinism by spurring the emergence of fierce competitors in targeted industries.
Since Japan's bubble burst in 1989, its economy has stagnated, and the world no longer feels threatened by the Japanese juggernaut. In August 2010, Japan went from the world's second-largest economy to its third (behind the U.S. and China). And one of its largest companies, Toyota (TM), continues to be mired in quality problems that threaten a core aspect of its franchise -- the idea that it makes the best-quality vehicles for which it can charge a price premium.

Nevertheless, many Japanese management principles still make sense. Of these, the spirit of continuous improvement coupled with a desire to keep learning can form the basis of a Japanese revival. In my view, some fundamental tenets of Japanese management remain relevant around the world. Of these, here are the three most important:

  • Linking a detailed understanding of customer needs with a workplace environment that motivates employees to satisfy those needs. This remains a useful principle, but leading companies are taking it a step further. Instead of merely listening to customer needs, these companies are getting ahead of customer needs by thinking about the future trends that will change customers' lives. By thinking about such trends, they come up with new products that anticipate customer needs -- which leads to market share gains.
  • Close attention to details of product quality, supported by cross-functional communication. This principle continues to be important, particularly for products and services where customers value extremely high quality. Japan remains unparalleled in this category. Unfortunately, Toyota lost its way because it decided to put rapid growth ahead of the need to transfer the quality mindset across management generations. But those principles still make eminent good sense.
  • A willingness to learn from competitors' best practices. This scholarly approach to what rivals do can be very useful -- but it also risks being a trap. If the analysis identifies opportunities to outperform competitors in satisfying customer needs, then it will help companies to gain market share. If the competitor analysis is used merely to keep pace with these rivals, it could be a waste of time.
These days, the U.S. seems keen on avoiding the many economic policy mistakes that have mired Japan in two decades of deflation. But the world business community owes a debt of gratitude to Japan for its management innovations -- and these three principles should remain beacons to managers everywhere.


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